Drucker’s Five Basic Business Sins

Writing in Bloomberg Business Week, Rick Wartzman reminds us of Peter Drucker’s 1993 essay, on a quintet of “avoidable mistakes that will harm the mightiest business.” He does this in the context of Kodak’s Chapter 11 bankruptcy, noting that Kodak committed two of these five basic blunders.

They are:

preoccupation with high profit margins. Kodak’s near-monopoly position in silver-iodide film generated very high profit margins. It led Kodak to ignore disruptive technologies that began, as always, with low profit margins.

“About 10 years ago, Kodak did try to move more forcefully into digital cameras. It couldn’t figure out how to make money on them, even as it became the leader in U.S. sales. Kodak’s frustrated chief executive officer, Antonio Perez, wound up calling it a “crappy business”… “ It WAS crappy. You don’t need to buy film to make digital photos, only a camera. But, that’s life. Adapt. Live with it. Otherwise, you’re a dinosaur.

“slaughtering tomorrow’s opportunity on the altar of yesterday.”

“ … In the mid-1980s, a consulting firm called the Index Group predicted in a report to Kodak’s marketing division that digital technology would take over film by 2000. “They rejected our work and told us it would not happen until after 2020,” says Adam Crescenzi, who helped prepare the Index analysis. “They laughed it off.” “ Disruptive technologies disrupt earlier, rather than later – and even if they don’t, always ASSUME they will…

The remaining three business sins, according to Drucker, are:

“mispricing a new product by charging ‘what the market will bear’;

“cost-driven pricing” in which you merely add up your expenses and then stick a profit margin on top.. (always price by value, not by cost), and

* “feeding problems” while “starving opportunities.”

I’m quite certain Kodak committed those three, too. And a few more. Recall how Kodak bought a drug company, Sterling, for a huge price, incurring massive debt, because…its CEO believes its stable of 500,000 chemicals might somehow turn up a winning medicine! And when it did find itself in trouble, Kodak focused on them, rather than doing as Drucker said, beginning innovation by abandonment (the creative destruction Schumpeter spoke about) before embarking on anything new.

It’s always easy in hindsight to run post-mortem autopsies on failed companies. At the same time, it is hard to understand why smart highly-paid executives, including the brilliant George Fisher, who was CEO and Chair of Kodak from 1993 (the year Drucker wrote his essay) through 2000, made several basic mistakes, over a period of years. As always, ordinary working people pay the price, as their jobs disappear.